A lack of diversity in fintech investments and among venture capitalists and founders was the topic of a congressional hearing this week, but congressional members were at a loss for ways to rectify inequities.
The House Committee on Financial Services’s task force on financial technology convened Thursday to discuss “Combating Tech Bro Culture: Understanding Obstacles to Investments in Diverse-Owned Fintechs.”
Presenting to Rep. Stephen Lynch (D-MA), who leads the task force, and other Congress members were five people who have experienced the lack of diversity either in founding a company, seeking investments for startups or working to increase diversity in venture investing.
Despite a proliferation of fintech companies in recent years, with $35 billion in investments for them last year, research handed out by the committee’s staff for the digital hearing cited reports that just 2% of that money flows to female founders, only 1.8% to Latinx founders and 1% to black founders.
The memo noted that because many fintechs cater to minority communities, the underrepresentation in investments delivers a double whammy. “Many fintechs espouse the main focus of their companies as reaching consumers who are underserved by traditional financial institutions, including women and people of color, so the lack of VC available to diverse-founded fintechs is potentially troubling as it could hinder innovation that would benefit underserved consumers,” the task force’s majority committee said in a memo for the hearing.
While venture capital had mushroomed, with investments in fintechs nearly doubling last year, female-only founded companies consistently receive just 2% of funding, the memo said. A slew of fintech startups are pursuing technological advances in the area of payments, with record sums raised last year.
“Many observers attribute the relatively low female-founder (venture capital) support to the fact that the VC industry itself lacks female representation,” the memo said. “Research repeatedly indicates that investors tend to invest more in founders of the same gender, race, and ethnicity.”
Fintech founders testify
Former Wall Street executive Sallie Krawcheck, who founded the firm Ellevest to increase retail investing by women, was among those who presented testimony at the hearing. She and others noted that women and minorities receive less investments even though data shows more diverse leadership delivers better returns.
Even if female founders find women willing to invest in their companies, that can make it tougher for them to raise money from men later because of questions as to why men didn’t invest earlier, Krawcheck said.
Lynch echoed her concerns. “Venture capital firms continue to gamble on poor investments such as cryptocurrency companies like Celsius, which recently froze all customer deposits, while on the other hand, women and founders of color with well-thought-out, substantive business plans remain in the waiting room,” he said.
Republicans also pointed to the lack of diversity among states when it comes to venture capital investing, noting the concentrations of investors in the San Francisco area, New York and Boston. Rep. Warren Davidson (R-OH) also bemoaned the flight of U.S. investment funds offshore.
Wemimo Abbey, the founder of the rent payments company Esusu who immigrated to the U.S. from Nigeria when he was young, testified that despite his ability to overcome odds and build a billion-dollar business that American dream is out of reach for many minorities who can’t land investments.
He said the racial wealth gap persists because venture capitalists invest with people who they are comfortable with, and that tends to be white men. That exclusion keeps minorities from being able to fund companies and affects their financial status in other ways, too.
Abbey co-founded Esusu, a company that allows tenants to use their rent payments to build a credit history because he was so perturbed that consumers’ mortgage payments were taken into account by credit bureaus, but not rent payments.
Abbey recommended three moves for addressing the lack of equity in fintech venture investing. He suggested creating tax incentives for banks and credit bureaus to work with and adopt technology developed by minority-owned startups and for venture capitals to make bets on minority-owned startups. He also recommended regulators engage in more conversations with minority founders to better understand their challenges.
Separately, the congressional memo noted that the Securities and Exchange Commission’s Small Business Capital Formation Advisory Committee had deliberated on ways to reduce barriers so that underrepresented founders and investors are added to the ecosystem.
“VC fund advisers could be subject to SEC or state registration and oversight if they have more than $150 million in assets under management,” the memo said.
At the hearing, one solution discussed that didn’t elicit any consensus from Democrats and Republicans was to allow retail investors, who generally aren’t qualified to invest in riskier startups because they lack sufficient assets, to jump into the venture capital market. Some considered that too risky for the average investor.
For his part, Lynch said legislation might emerge at some point. “I welcome policy approaches such as reporting requirements or an SEC scorecard that would push venture capital to abandon the sort of old boys club culture,” Lynch said. He said legislation might emerge at some point, without providing details.